Inuvo Inc (INUV) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Inuvo second quarter 2009 earnings call. (Operator Instructions). It's my pleasure to turn the floor over to your host, Melissa Wit. Ma'am, the floor is yours.

Thank you, operator. Earlier Inuvo released it's financial results for the three months and six months ended June 30, 2009. If you have not received the press release, it is available on the investor relations section of the Inuvo web site at www.inuvo.com. This call is being webcast, and a reply will be available on the company's web site for 45 days. Before we begin we would like to remind you that today's remarks contain forward-looking statements within the meaning of Federal Securities law. These statements do not guarantee future performance, and therefore undue reliance should not be placed on them.

We refer all of you to the risk factors contained in the Inuvo Form 10-K, filed in March 2009, for a detailed discussion of the factors that could cause actual results to differ materially, from those projected as any forward-looking statements. Inuvo assumes no obligation to provide any forward looking projections. This conference call contains time sensitive information that is accurate only as of the date of the live broadcast, Friday, August 14, 2009. Inuvo under takes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. Participating in the today's call from the Company are Chief Executive Officer Richard Howe and Chief Financial Officer, Gail Babitt. And with that, I would like to turn the call over to our CEO,Rich?

Thanks, Melissa. Welcome to Inuvo fiscal year 2009 second quarter conference call. For those of you who are new to our story, Inuvo is an online marketing service company. Through technology, the Company facilitates transactions between advertisers, who are looking for customers, and publishers who are looking to monetize their website traffic. When combined with the access our exchange provides to hundreds of thousands of advertisers, and thousands of publishers, our predicted technologies that prevent click fraud, and allocate ads based on the highest return and conversion rates will differentiate our service in this marketplace. Since 2004, the Company has grown through a series of acquisitions. Within the last six months, a majority of the Company management and board of directors has been changed. District organizations and technology have been integrated. Non-strategic assets have been divested. Operational efficiencies and a technology vision implemented, the enterprise rebranded, and new products introduced to market.

The Company operates along two business segments, the Exchange Segment, which includes all the technologies which underpin our online marketing platforms. And the Direct Segment which markets Company branded and third party direct to consumer continuity marketing products. On the call today, I will be providing a high level summary of operating performance and highlighting some of the important milestones we achieved in the first half of the year. I will also comment on the recent Yahoo Microsoft partnership announcement in then context of our business. And I will introduce a number of new initiatives we expect to bring to market by early 2010. Gail will follow me today,providing a more detailed analysis of our financial results for the quarter, bringing you up to date on our refinancing efforts, explaining change in auditors, and the discussing progress towards divestiture of our agency business.

Let me begin with our performance over the first half of the year. Revenue for the six months ended in June was down $6.6 million, to $25.8 million, from $32.4 million, for the comparable period in 2008. This revenue decline was in part the result of market conditions that have affected both advertising spend which impacts our Exchange Segment and consumer spend which impacts our Direct Segment. Direct revenue for the six months ended June 30, 2009, was $11.6 million, down from $20 million, for the comparable period in 2008. Exchange revenue for the same two periods was up $1.6 million, to $14.7 million, from $13.1 million, in 2008. The primary driver of the overall Company revenue decline over this period can be attributed to two factors. The first was a decision in Q2 of 2008 to discontinue certain key operations within the Direct Segment. The second was a challenging consumer spending environment brought on by the recession.

The consequence of the first decision was removal of personnel and investment within the Direct Segment. The consequence of the second was a reduction in demand for consumer products within the Direct Segment. Total leads generate remains an important metric within our Direct Segment. And between Q1 of 2008 and Q4 of 2008, that lead volume dropped almost 62%. New management teams reversed decision to discontinue this operation early in Q1 of 2009. Since that time, we have seen the business steadily increasing both at the top and bottom lines despite the recession. Direct revenue has increased sequentially for the last two quarters, and the total number of leads generated was up 21% in the current quarter. This trend has been continuing for the first seven weeks of Q3.

For the Exchange Segment, while revenue was up for the first half of the year, we did experience a revenue challenge in Q2, as compared to Q1. On our first quarter 2009 call, we alerted you to a challenge in the PPC markets wherein overall keyword bid prices and availability of ads were declining. This trend which started for Inuvo in March, continued all the way through June. And as a result, revenue for the quarter, as compared to the previous quarter was aversely affected. It is important to note that competing companies to our Exchange Segment, have experienced on average revenue declines in excess of 20% for the first six months of 2009. As noted earlier, Exchange Segment is actually up 12%, as compared to the first six months of 2008.

Further, was a revenue for the period between March and June declined within the exchange, the revenue for the period between July and August 14th, has increased. Early in the first quarter of 2009, management implemented aggressive cost containment measures. For the first half of 2009 these tactics allowed the Company to grow both EBITDA to $1.9 million, and net cash to $4.9 million, both up from the prior half year period. SG&A expenses for the first half of 2009 were down 27%, or $4.4 million, to $11.8 million from $16.2 million, when compared to the same six month period in 2008. Total debt was down $2.5 million, to $7.4 million at the end of June 2009, as compared to the period ending in December 2008, when total debt was $9.9 million. Although revenue for the six months has been challenged, we are cautiously optimistic that the revenue trends have now started to stabilize.

Let me now shift gears and talk about the important milestones achieved this quarter. We made a decision in Q1 to rebrand the Company. It was our belief that the Kowabunga brand was both dated, and candidly, not well received on initial exposure to most prospects. Market studies conducted in Q1 reinforced our perception of the Kowabunga brand. We reviewed and tested a number of brand alternatives, and ultimately decided to go with Inuvo, which is derived from the word innovate and nouveau. The brand is short, has longevity, has innovation at its core, and acquiring the domain was cost affective. Going forward the majority of our products and services will begin carrying the Inuvo brand in their naming conventions. Consistent with this renaming, we also launched our new website on August 10th at Inuvo.com.

In addition to simply creating a more modern look and feel for our brand, the principle driver of the website redesign was the launch of our new self service performance marketing platform. Since the new website is the interface for this new platform for both advertisers and publishers, the entire experience of the new website is geared towards serving first and foremost this community. The beta launch of the Inuvo platform is significant for a number of reasons. Firstly, the market has and will continue migrate towards marketing technologies and channels that offer more direct measurement of results. The cost per action market, which the new platform is currently aimed at, represents attractive investment for most marketers because the action they define is more easily understood and measured.

Secondly, the existing technology Inuvo has for affiliate marketing, the MyAP platform, while adequately serving hundreds of customers today was constrained in its scalability. Many of the implementations of MyAP were custom, and as such represent hundreds of small marketplaces, as opposed to one large single marketplace. This new offering, for the first time provides Inuvo the opportunity to derive the benefits that come with having a single platform that serve many customers, as opposed to many platforms serving many customers. We have also taken the opportunity as part of the design of this platform, to remedy certain challenges that our existing customers and market research have suggested would be beneficial to all. While these design considerations are too numerous to detail on this call, I can say that the quality of transactions, and the insight advertisers have at the transactional level for both leads and sales, combined with greater transparency into the fees paid to all parties were important drivers for us.

Additionally, our experience with hundreds of MyAP customers reinforced within us the notion that whatever platform we designed, it was imperative that we make it extensionable. And ultimately that we make available, a set of API's that allow advertisers publishers and others the ability to extend the core functionality to suit their individual needs. While these API's are not yet available in this early beta release, the architecture to support them is. It is important to note that this beta launch is but one step in a multi-phased plan. For the remainder of the year, we will be improving the functionality and feature set of this cost per action platform as directed by the results of the beta production clients.

Over the longer term, this new foundation will be the means through which we integrate all of the Inuvo online marketing technologies. With the beta platform release, the Company rebranding and major operational issues behind us, attention is now shifting to improving sales performance. I am pleased to report that we have retained an exceptional executive to lead this function at Inuvo. And he brings with him many years of experience within the markets we serve. He starts on Monday. The sales organization at Inuvo has historically been fragmented that was th was a key area of the Company that needed to be addressed. And we wanted to ensure that before we hired this leader, we remedied any constraints to their ability to deliver results. The launch of the Inuvo platform was the ideal time to bring in this leader, and get him focused on building a sales strategy that supports our vision for this platform. I'm pleased to report that we retained Genesis Select as well to guide our Investor Relations strategy. Genesis Select will be assisting Inuvo, as we begin our efforts to build long-term relationships with portfolio managers, buy and sell side analysts, and the investment community at large.

I would like to now share my views on the Microsoft Yahoo partnership announce. For those of you who are new the the Inuvo story, as a means to provide some context, it's important to note that the Company maintain a significant partnership with a tier one advertiser within Search. At the highest level, the partnership between Yahoo and Microsoft creates a more formidable competitor to Google and Search We believe over the long-term, this association creates a bigger search marketplace within which we can provide our services. This new marketplace could attract more advertisers and drive higher revenues per click, both of which would benefit Inuvo. In the short-term, we do not foresee any immediate impact to our business, our relationship owners are not currently expected to change as a result of this partnership.

I would like to now comment briefly on the development activity we have underway, which should be delivered early in 2010. Our immediate development focus is to continue to enhance the Inuvo platform with the additional features and functionalities necessary to compete in the cost per action marketplace. Beyond this primary focus, we are currently working on designs to integrate the platform that supports our search business in to the Inuvo platform. In addition to the operational efficiencies inherent in this strategy, the ability for publishers to have access to both for cost per action and cost per click advertisements will be a compelling differentiator for Inuvo. We are also currently working on developing a dynamic advertising unit for the platform. The project has multiple goals for Inuvo which include the ability for advertisers to gain access to display market, from within the Inuvo platform. And the ability for publishers to easily access a piece of technology, designed to optimize the best cost per action or cost per click ads based on analytics.

Additionally, we will soon launch a web property called Yellowise.. As the name might suggest, this is a yellow page search site. Having such a site provides us the flexibility to test new technologies within our environment that we can control, and can be monetized by our PPC advertising inventory. Finally, we are currently testing in a limited deployment, proprietary applications designed to run within social networks. These tests will determine whether or not access to leads through these applications provides yet another potential differentiator for the Inuvo platform. I would like to now turn the call over to Gail Babitt, Inuvo's CFO, for a more comprehensive discussion of our financial results in the quarter. Gail?

Thank you, Rich. Good afternoon and thank you for joining us today to discuss the company's second quarter 2009 financial results. As mentioned by Rich, I will discuss the following items today. The operating results for the three months ended June 30, 2009, the status of our divestiture of MSA, our change in auditors and legal firm, and the status of our bank refinancing efforts. I will discuss the MSA divestiture with the results from discontinued operations, the change of auditing and legal firms with the analysis of SG&A. And our refinancing in relation to the current debt balance. Now for our quarterly financial results. Our revenue from continuing operations declined by 27% to $11.8 million for the three months ended June 30, 2009, compared to $16.1 million for the comparable period in 2008. Reduction in revenue from continuing operations, was driven primarily by our Direct Segment which experienced a decrease of 37%, going from $9.7 million in 2008 to $6.1 million in 2009.

For the three months ended June 30, 2009 out Exchange Segment also experienced a decline in revenue of $0.6 million or 8%, from $6.7 million in 2008, to $6.1 million in 2009. The decrease of revenue in our Direct Segment was the result of reduced investment in 2008, after discontinuing operations and declining consumer spending. The Company decided to bring the continuity marketing business back in to continuing operations in February of 2009, and started to reinvest in the programs during the second quarter. While we are still not at 2008 levels, we have experienced the 12% increase in revenue, from the first quarter of 2009 to the second quarter of 2009.

The leads generated in the Direct Segment help us gauge the effectiveness of our marketing campaign. As such, we saw leads begin to drop off in April of 2008, to the low in December of that year. Leads increased in June 2009, by 43%, and in July by an additional 63%. While the primary driver for the year-over-year decline in revenue was the Direct Segment, much of this decline was anticipated the due the expected ramp up time needed to re-establish the continuity marketing pipe line. The bigger impact on our quarterly results from internal plans, was really from the Exchange Segment with declines not anticipated for the second quarter of 2009. The search product within our Exchange Segment had been growing for eight consecutive quarters since December 2006, when the search product was generating $1.3 million of revenue per quarter. The catalyst for the short-term decline in the Exchange Segment revenue in Q2, has been weakness in the PPC advertising marketplace.

This weakness is realized in two ways. First, lower bid prices paid by advertisers, and second, a lower click-through rate resulting from fewer adds. We seen reversal of that trend within increase in clicks of over 25% from June to July. We are seeing this trend continue in the first half of August. Total gross profit from continuing operations declined by $2.6 million, or 36%, to $4.5 million for the three months ended June 30, 2009, compared to $7.1 million for the comparable period in 2008, reflecting the reduction in gross margin rates from 44% to 38%. The impact on gross profit was primarily the results of the decline of revenue in the Direct Segment, where the gross profit decreased by $1.8 million from $4.8 million in 2008, to $3 million in 2009. Additionally, competitive pressure within the Exchange Segment contributed to the decline in gross profit in that segment, which decreased from $2.4 million or 35% of revenue in 2008, to $1.5 million or 25% of revenue in 2009.

Our Company wide SG&A cost from continuing operations improved by 29% to $5.6 million for three months ended June 30, 2009, compared to $7.9 million for the comparable period in 2008. Approximately $0.9 million of SG&A reductions relate to compensation across the Company, reflecting the head count reductions in the consolidation of responsibilities to a smaller group of executives. Other items that have been reduced depreciation and amortization, marketing merchant processing, facility costs and professional fees. We will continue to evaluate and monitor these costs to try to minimize them when ever it is possible. One of the additional changes that we made during the second quarter was to retain a new auditing firm, and a new outside SEC counsel. Both of these firms came highly recommended. We believe these changes will produce more efficiency, and effectiveness. We expect to save a few hundred thousand dollars a year as a result of these changes, while still maintaining the same level of quality.

The net loss for the company was $0.8 million, or $0.01 per share for the three months ended June 30, 2009, compared to a net loss of $34.7 million or $0.51 cents per share for the comparable period in 2008. Included in the net loss for 2008, is an impairment charge from continuing operations of $28.1 million, and a loss from discontinued operations of $11.6 million. The loss from discontinued operations for 2008 includes impairment charge of $11.3 million. In 2009 the company has no similar impairment charge, and has a profit from discontinued operations of $0.5 million. The only business that remains in our discontinued operations is MSA. And even though the operations have improved to provide positive cash flow, we still believe the right long-term decision is to sell the entity, if the economics of the transactions remain compelling. We are in discussions with several potential acquirers of MSA and planning for the divestiture to be completed in 2009. The EBITDA for the Company was $1 million, for the three months ended June 30th, 2009, compared to $1.4 million for the comparable period in 2008. The decline in EBITDA reflects the impact on revenue from the tough economic climate, which is partially offset by the cost containment measures in both continuing and discontinued operations.

Let me now discuss the status of our credit facility. The balance of our Wachovia credit facility is $7.4 million at the end of the second quarter of 2009, a decrease from the $10.6 million balance from the same period in 2008. Although we have paid down $3.2 million of our debt from the comparable period in 2008, since the current credit facility does not meet our needs and currently matures in March of 2010, we are actively pursuing new financing opportunities. We are in discussions with five financial institutions to participate in a new credit facility that will, one, take out Wachovia, and two, provide the proper level of financing to continue to grow our business.

Now I would like to summarize the quarter. As we reported both today and on previous conference calls, we are taking a number of actions we believe will positively impact performance. Firstly, we are adding new product lines in the Direct Segment as a means to expand revenue. Secondly, we are developing a new platform within the Exchange Segment that will provide greater value added services for both advertisers and publishers. And thirdly, we continue to manage our expenses. We look forward to reporting our progress over the coming quarters. And I would now like to turn the call back over to Rich.

Thank you, Gail. Our business did experience a revenue challenge in the second quarter. In in this regard we are certainly not alone. However, despite an unpredictable economy the fundamentals of the business, and the team's resolve to execute have been encouraging. Over the last six month period, Inuvo has reduced debt, improved earnings, and cleaned up the balance sheet, grown the Company's marquee Exchange Segment, turned around the company's Direct Segment through introduction of new products, augmented management and the board of directors, most recently hiring a head of sales, rebranded the enterprise, and launched a new online marketing platform, improved through renegotiation its' tier one advertising relationship, sold one of the two noncore businesses, and improved cash flow in the other, reorganized around two distinctive but related business segments. For the period in the third, through August 4th, the business fundamentals within both segments are trending positively. I will now turn the call back over to the operator for question-and-answers. Operator?

Thank you, sir. The floor is now open for questions. (Operator Instructions). Okay, and our first question comes from Patrick Terrell from the Terrell Group. Sir, you may state your question.

Hi, Rich, hi Gail.

Hi.

Thank you for the call. It's a lot of great information that you provided us today. Gail, I have a question on -- I'm assuming most of the cash that we have been able to generate to pay down the line, and create cash for the Company -- is it true that a lot of that has come from a reduction in our accounts receivable? It looks like our receivable has gone down by about $4 million or $5 million, year-over-year, is that correct?

Yes. Pat, great question. It's coming from our cash flow from operations. which is primarily driven by our reduction in receivables, and the collection efforts that we've been doing to date ,to make sure that we keep as much as possible as current as possible.

Good, good. Then on the new sales executive Rich, you didn't mention the person or where they came from. Is that asking too much to talk about that right now, or is that going to be a press release next week?

I think we are planning a press release, I would prefer not to name the individual. What I can say is I went through a process to pick this person personally, much as I did to pick Gail. And -- I think I reviewed over 250 resumes, and I don't know how many people I spoke to, there was lots. This person caught my attention in large part as a result of a combination of experiences they had in their background, both offline, and online oriented. And also they had a background within the data business. And as we have said on prior conference calls, we do believe that there are information assets in this company that could be better monetized. And I thought the combination of these experiences, strong, strong experience in the digital world, particularly in the affiliate marketing world working with publishers and advertisers, strong offline experience having worked in marketing services offline. And then the combination of, sort of a data and analytics background was a ideal candidate for me. So we welcome him to the team on Monday, and I'm sure he is listening right now.

Well, congratulations on that. And then Gail, back to it sounds like we're -- you are working with several financial institutions, I'm assuming banks, is that correct in looking at replacement for Wachovia?

We are in discussions with several banks, and to that end we presented plans obviously to the banks. And we are now performing consistent with plans and we are on track to hit the performance for Q3 as well. So conversations are progressing, and we are cautiously optimistic.

Good. Well I want to compliment you. I know you've done a lot of work over the last couple of quarters to get things put in place. And hopefully we will bear the fruit of that effort in future quarters, so thank you very much.

Thank you.

(Operator Instructions). Our next question comes from John Hickman from MDB Capital. Sir, you may state your question.

Hi, I am somewhat new to your story, at least new to the last six or seven months of it. But could you elaborate on this local search, yellow pages comment you made?

We are not providing a lot more information that than I did in my notes John, other than to say at this point we do need places within our network, publishing places, where we can test some of the varying technologies that we are introducing in to our platform, in sort of an unconstrained environment. We do a lot of business with publishers today. We clearly don't own and operate those websites. So it becomes difficult for us sometime to want to introduce new pieces of technology in to that environment, simply because it's not in those publishers interest to immediately to do that with us. So one of the catalysts for us now, was the ability to have a site that we could own and operate ourselves, that we knew we could generate sufficient revenue from, which is what we are going to do. Because we are going to start display our own ad inventory in to that site, and use it as this sort of test facility. Beyond that, if it's still too early to comment on it.

So what are you calling it? Yellow Eyes?

Yellowise -- y, e, l, l, o, w, i, s, e, dot com

-- i, s, e -- yellowise.com Okay -- and so -- just a little bit -- are you going to try and drive -- I mean you are going to list advertisers on that site -- how are you -- are you going to care to much about driving organic traffic to that site?

I think we will over time, and in the early going we will probably drive it inorganically, because we want to obviously support the efforts that we doing to produce the technology. So we want the thing to kind of break even for us, so we can do what we need to do, nobody knows who it is -- so we are not going to get a lot of organic travel -- traffic. So we will do some in organic. If organic traffic starts to pick up, well, all the better.

Okay. Thank you.

Our next question comes from Mike Balkin from William Blair. Sir, you may state your question.

Hi, guys, how are you doing?

Hi, Mike.

I wanted -- I just wanted to touch base -- just kind of looking at the profitability in the various businesses -- for some of the reasons you pointed out -- the Exchange business gross margins were down pretty substantially, while the Direct side of the business, those margins were up nicely, even though the revenue is -- is come in. Can you maybe give us an idea, as to what your targets might be for the margins in each of those businesses? I recognize that we are not in a steady state level now, but when we move towards a steady state -- where do you think those margins -- kind of what kind of range should we think about for modeling purposes?

Hi Mike, thanks for the question. Yes, obviously we are still sensitive about giving guidance, but let's talk just directionally in some of the challenges that we are -- that we are facing and where we are going.

Okay.

For the Direct Segment, you know as you mentioned, we have healthy margin there. And it definitely is a nice compliment for our Exchange business. For Exchange segment, we've been squeezed. So between the publishers and the advertisers, we are getting a smaller piece of the pie. But that's where our new platform comes in to play but us being able to add new service offerings in to the platform. And ultimately then add the sale of data to the equation, we believe down the road we will be able to improve the margins. ,

Would it be fair to say though-- that we are at a low point in where those margins are, I mean, you came in at 23.4%, that was down from 35.8% the year before, so without pinpointing on a number, do you think directionally though, that we've seen the bottom there?

Yes. I think for the next quarter or so, we are going to still be squeezed while we are just introducing more of the services into the platform, and migrating additional business over there. And then we should start to see an uptick. But I don't expect the floor to go much further from here, but I don't know how long it's going to take before we start getting some improvement.

Okay then, on the direct side, do you think that again -- where you are coming in with the margins, and especially with the addition of some of the new products and stuff, that we should think about it -- that we can continue to maintain those kind of margins, hopefully adding and layering on more revenue with some of the new product offerings?

Yes. For the Direct Segment, it's going to be a combination. I think we are going to be able to stabilize and maintain those levels, when we start to also compliment that with some of the data sales.

Okay. Great. Thank you very much.

You're welcome.

(Operator Instructions). Our next question comes from Patrick Terrell from the Terrell group. Sir, you may state your question.

Mike Balkin just handled it all. Thank you.

And sir, there appear to be no further questions at this time.

Thank you. I would like to thank even who joined us on today's call. We appreciate your continued interest in Inuvo, and look forward to reporting progress over the coming quarters. Thank you.

This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.